Friday, April 18, 2008

Bookkeeping: 2 New Positions - Intuitive Surgical (ISRG) and Morgan Stanley (MS)

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I'll be adding 2 new positions this AM once the market opens

#1 Intuitive Surgical (ISRG) - this is a 1 of a kind medical company which reported a stellar quarter but sold off on the "great quarter but not good enough to make the crazy expectations" game. This is a very pricey stock and I was hoping it would stay down to where it was last night in after hours ($310). Since I cannot buy in premarket or afterhours I am stuck with the opening price which is looking like $320+. Technically the stock hit its 50 day moving average in afterhours. I had planned to buy this company (but missed it by a few bucks) in the mid $200s in mid March. More on Intuitive Surgical here [Feb 1: Intuitive Surgical Very Impressive]

The valuation has been very rich for a long time, but it's essentially a monopoly. The fear has been hosptials (due to credit crunch) would begin pulling back on purchases of the very high end robotic machines. Again, we have to fight the "hidden shadows behind every corner" in a bear market. Thus far it does not appear to a true thesis that the bears are advancing in this name.

This is an impressive report and shows the benefit of its "razor and shaver" strategy - sell the shaver, and make long term, consistent profits off selling the razors indefinitely.

#2 Morgan Stanley (MS) - as I wrote yesterday in my last post, people will ignore the Citigroup (C) number no matter what it is this morning. Here is the bull thinking - if the numbers came in worst than expected this is just the kitchen sink quarter and everything is up from here (which is what happened) & if the numbers are better than expected than we are already turning the corner and everything is up from here. See? There is no way to lose - either scenario it is "everything is up from here". This is the herd thinking and I cannot argue with the herd. Of the 4 major investment banks Morgan Stanley (MS) has the best chart so that is why I am buying it - Goldman Sachs (GS) is obviously the other option. I am not that interested in Lehman Brothers (LEH) or Merrill Lynch (MER) - because while they might have more upside I still think they have more risk. Much like the homebuilders I own, I don't really "believe" in this position but when the market tugs up the financials I need more exposure and going forward if everyone believes the worst is behind us, I need to have more exposure in this group - even if intellectually I disagree.

I wrote a few weeks ago that Ultrashort Financial (SKF) is becoming less attractive [Mar 19: Alt A Mortgages Beginning to Break Down; Ultrashort Financial Not as Cool as it Used to Be], mostly due to composition of the stocks withing it, but also we are reaching a point in financials that much like homebuilders - no matter what amount of bad news you throw at them - people shrug it off and so "oh well, things will be better in 6 months". I don't want to fight the herd, so I'll be reducing this exposure along with Ultrashort Real Estate (SRS) this AM, take the short term hit, and then review at some point later in the future when people return to a more logical view. Again, being intellectually correct yet being run over by a herd of stampeding bulls does us no good. The great irony is all we are really pricing in are the writeoffs from subprime. The whole credit contagion of commercial real estate, alt A mortgages, prime mortgages, credit card writeoffs, student loan write offs, auto loan write offs? Don't worry about all that - it is "all priced in". A suffering consumer battered by inflation and job losses (another 30k potentially gone from Citigroup today) is somehow going to keep paying all this debt. But none of it matters as long as multinationals can sell stuff overseas and benefit from the weak dollar - this is market logic at its best.

I plan to buy quite a few other things this morning since I have a >40% cash position, and I will be focusing on things that have been lagging but might be beginning to break out (i.e. infrastructure). The dollar is strengthening on all these "great" earnings reports, which is sort of ironic because the vast majority of the "great" earnings reports are due to the weak dollar. This could put pressure on commodities so I don't plan to expand exposure there.

We've had a few episodes now over the past few months where commodities sell off, while financials, retailers, and homebuilders ("early cycle" plays) ramp. This could be one of those times; I was thinking it might be time yesterday in fact when the financials rallied on a horrid Merrill Lynch number, and the commodity stocks were selling off. When we enter a true bull market, we'd want to see both groups ramping together, not one or the other. I just am hesitant to chase stocks up 30-40% in 2 weeks (commodities) so if I add long exposure I'd rather do it in sectors that have been lagging.

Again S&P 1390 is key - if we break up above that - we just have to throw all logic to the side and join the herd. I entered this week cautious and not wanting to lose money, knowing I would lag the market if it ramped - which has happened. But that's ok - the fund returns are still positive for the week, just trailing the market. I continue to believe very little of the consumer recession is being priced in, but that's just me...

I'll edit this post with prices and fund holding in the 2 new positions after the transactions are complete. 10:35 AM - I created a 3.6% stake in ISRG buying in the mid $290s to mid $300s. Downside risk is to $265 at which point I will add more. I created a 2.1% stake in MS buying around $48; support is down at $46 - not sure if I'll add more - depends on how much Kool Aid I drink that day

Soon to be long in Intuitive Surgical, Morgan Stanley in fund; potentially long in personal account as well (TBD)
Long Ultrashort Real Estate, Ultrashort Financials in fund; no personal position




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